• What Russia’s Fuel Export Ban Means For The Markets

    Russia’s temporary ban on diesel and gasoline exports—while intended to address domestic shortages and soaring prices—could exacerbate an already tight global diesel market and drive crude and middle distillate prices higher ahead of the winter.

    And its relaxation of the ban on low-grade diesel won’t stave off much tightness.
    Most analysts believe the ban will not last long as it would lead to stock builds in Russia, which lacks spare storage capacity. But many observers also believe that Russia is weaponizing energy supplies again, trying to roil central banks’ efforts to tame inflation ahead of yet another winter.

    The Ban

    At the end of last week, Russia surprised the markets by announcing a temporary ban on exports of gasoline and diesel to stabilize fuel prices on the domestic market amid soaring prices and shortages due to higher crude prices and a weak Russian ruble.

    Diesel and gasoline exports are now temporarily banned to all countries except to four former Soviet states—Belarus, Armenia, Kazakhstan, and Kyrgyzstan. The export restrictions don’t have an end date, so Moscow could decide at any time to lift the fuel export ban or amend it as it pleases.

    Earlier this week, Russia did tweak its export limitations on fuels, lifting the temporary ban on exports of low-quality diesel and marine fuel and allowing the export of fuel supplies that already have loading papers and are accepted for export to proceed.

    The key question is how long the diesel export ban will last. If it extends beyond October, it could threaten a more acute global middle distillate shortage, especially in Europe just ahead of the winter heating season when middle distillate demand typically rises.

    The Market

    Since the EU, the U.S., and other Western allies banned imports of Russian seaborne fuel in February, Moscow has exported its gasoline and diesel to Turkey, the Middle East, and South America. Those markets are now temporarily off limits for Russian diesel and gasoline. Saudi Arabia, for example, is thought to have been snapping up Russian diesel at knockdown prices and sending its own diesel to Europe. With a longer-than-expected ban on its diesel exports, Russia could indirectly further tighten the diesel markets in Europe and Asia.

    Before the Russian fuel export ban, refinery margins had already hit the highest level in eight months in August, as refiners were struggling to keep up with oil demand growth, especially for middle distillates, the International Energy Agency (IEA) said in its latest monthly report.

    It will take up to two weeks for the market to feel the impact of the Russian diesel export ban, Viktor Katona, lead analyst with Kpler, wrote in a Friday note cited by CNBC.
    But “By that point, however, the government might already annul this specific piece of legislation, as abruptly as it was published,” Katona noted.

    Most analysts concur that the export ban would be short-lived and as abruptly lifted as it was implemented with immediate effect last Thursday.

    “How severe of an impact the loss of Russian diesel has on the global market will really depend on how long the export ban is in place. Although, given the likely domestic stock build we will see as a result of the ban, we would not expect it to be prolonged,” Warren Patterson, Head of Commodities Strategy at ING, wrote on Friday.

    Also on Friday, industry consultants FGE noted that “A key point to remember is that the diesel ban cannot last long. Once domestic supplies are replenished, Russia will have to resume exports due to a lack of spare storage capacity.”

    If Russia doesn’t lift the diesel ban soon, refineries will be forced to shut down in the face of no storage capacity. Thus, the export limitations will backfire on Russia via higher pump prices and domestic fuel shortages—the very issues Moscow is trying to solve with the ban, according to FGE.

    Refinery shutdowns could also lead to lower crude oil production in Russia.

    “We expect Russian diesel exports to resume latest in two weeks, and likely earlier,” FGE said on Friday, adding that the gasoline ban could last longer than the diesel ban, but with a small impact on the wider gasoline market.

    JP Morgan and Citigroup also see a short-lived diesel ban in place. JP Morgan’s analysts see the diesel export restrictions lasting a “couple of weeks, until harvest concludes in October,” they said in a note carried by Bloomberg.

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